Posted by: Josh Lehner | December 14, 2017

Why Housing Supply Matters

Last week, I was a panel member for the YIMBY (Yes In My Back Yard) breakout discussion at the Oregon Leadership Summit. The group overall discussed the lack of supply, the importance of affordability, some regulations, market conditions, public policies and the like. It was a wide-ranging and informative session, if I may say so myself. Today I want to recap a few things, and take another stab at visualizing the importance of housing supply and the role of filtering.

First, I discussed a few of the bigger picture things our office has done, including the significance of affordability for Oregon’s long-run economic growth, the fact that affordability truly is a statewide challenge, the main housing supply constraints holding back construction in recent years, and the importance of household income gains for affordability.

Second, the basis for the whole YIMBY panel is some forthcoming research by ECONorthwest, led by Mike Wilkerson. While our office has done some back-of-the-envelope calculations trying to quantify the underbuilding of housing, Mike and ECONorthwest bring a full-fledged model looking not just at Oregon, but across all states. The upshot of the research is Oregon has probably underbuilt housing even more than we think we have. One result of this work is that for the first time the Oregon Business Plan is incorporating a housing supply/new construction goal. In essence, the newly stated goal is for Oregon to build 30,000 new housing units per year. This calculation is based on our office’s forecast for housing starts (~24,000 per year) plus an additional amount of new construction to make-up the lost ground over time.

Third, just as we know affordability is a statewide challenge, we know the lack of new supply is too. Every region in Oregon is adding jobs and new residents, however we continue to see very low levels of construction – not just relative to the bubble, but prior to that even. This is particularly the case once you get outside of the Portland area.

Fourth, as we discussed previously, housing does filter. New construction is always expensive and always aimed at the upper third or so of the market. That said, over time as housing depreciates, it does become more affordable. This filtering does not happen overnight. It is a long-run process. Filtering is also the major way to provide reasonably priced workforce housing for those making in and around the median family income. There is not nearly enough public money to fund the affordability gap, given the demand is too large, and the costs are too high. Now, there is a role for the public sector to play, particularly for the lowest income households. Don’t get me wrong. Every single unit counts. However, the solution has to mostly be a private market solution. And the linchpin to this process is to continuously add new supply. If you build more housing, you get more filtering.

Finally, what follows is another effort to show how filtering works in the real world. What the charts below show is the current housing stock in the Portland metro based on the recently released 2016 American Community Survey data. The first chart shows the housing stock divided into thirds based on home values or monthly rents*. Then we look at when these units were built by decade. Remember, we segmented by price first, then by decade of construction, not the other way around.

From a big picture perspective, you will see that we have some expensive and some more affordable units from each decade, even if the exact breakdown varies based upon the unit type, geographic location, quality of construction and the like. That said, for today I want to focus just on the least expensive third of the current housing market, or the red portion. Basically, these are apartments that rent for less than $890 per month, and homes valued below $290,000.

The biggest takeaway you see is that the total or absolute number of these more affordable units is pretty evenly distributed across the decades. Yes, there are more of these units from the 1970s and 1990s because Portland built more overall during those decades. However, there are also as many relatively affordable units built in the 2000s as there are from the 1980s and 1960s. This, too, is because the Portland region built more housing in the 2000s. If you look back at the chart above, in the 2000s Portland built nearly a third more housing than in the 1980s, and nearly double what was built in the 1960s. Again, if you build more housing, you get more filtering.

All of that said, the really unsatisfactory part of this work is noticing how little the 2010s production has been to date. Yes, of course, we have yet to see the full decade. However, even with a few more decent years like we have seen lately, the 2010s is on pace to build as many units as we did in the 1980s. And that’s in the Portland area. Across the rest of the state we will surely build fewer units.

While the current lack of supply is a problem today, it will also last a generation, if not longer. The wounds of the Great Recession and housing shortage may heal, but they will remain visible. The reason is that the units that are currently filtering from more expensive to less expensive today are those largely built in the 1990s and 2000s. Fast forward to the 2030s and the small number of units built in the 2010s means there are fewer units to go around, and fewer units to filter then. All of this ties back to the ECONorthwest research and the new business plan goal of not only building enough housing today to meet current demand and population growth, but also trying to build more than that to make up for the shortfall.

* To arrive at the overall housing market thirds, I did segment the market further into single family detached, single family attached, and multifamily for both ownership and rentals. I then added these segments together to get the total.

Addendum: In the comments, I was asked if I could show the single family broken out from the multifamily. Here are the charts for each big segment of the market I looked at. Same general story applies, although the exact specifics of which decade is the largest and which has filtered the most is a bit different. The biggest difference would be the 2000s, where we didn’t build as much multifamily, but we did a good amount of single family (it was the housing boom/bubble, after all).


Posted by: Josh Lehner | December 8, 2017

Oregon’s Population Outlook

When the latest population estimates for Oregon came out the other week (see our summary here), I promised you an update on our office’s forecast when it was available. Since then, Kanhaiya, the state demographer in our office, has updated the population forecast and we did discuss it a bit with the Legislature at our latest forecast release as well. The upshot of the new outlook is our forecast for Oregon’s population has been raised. We are expecting a larger population and slightly stronger population growth rates over the next decade than we previously assumed.

Now, it can be hard to tell that the outlook is a bit stronger today if you just look at our standard population forecast chart shown above. That’s because the general nature of the outlook remains unchanged. Oregon is growing, and net migration is driving the growth. What has changed relative to our previous outlook is the composition of this growth moving forward. Oregon is expected to be even more reliant upon migration than we previously thought. Births continue to come in lower than expected, and deaths are rising a bit faster than expected. So the overall increase in the population forecast is entirely due to stronger migration trends. Now, again, this general flavor of an outlook has been what our office has expected for quite some time. As the population ages, we will see more deaths, and births have been disappointing for some time. However, in recent years these trends have been a bit more pronounced than expected. Our forecast has been revised accordingly.

In fact the sharper decline in the natural increase (births minus deaths) is now leading our outlook to suggest that by 2029 the number of deaths in Oregon will actually outnumber births. This date has been pulled forward relative to previous forecasts due to the population numbers in recent years and expectations about their future trends.

What this means, is that migration is no longer just one of the primary drivers and the lifeblood of Oregon’s economy — and our office’s long-term outlook — but it is also a risk to the outlook. The reason it is a risk is that migration is an increasing share of our population growth. In a decade it will be the entire source. This growth does wonderful things for our economy on net, in particular it brings in young, skilled, working-age households. There are growing pains too, but overall it is a clear boon for Oregon. However, if this growth, or these expected migrants don’t come to Oregon in the future — for whatever reason, be it a poor economy, lack of affordability or something else — then our office’s long-term outlook will be revised lower. It would mean a smaller and slower growing economy, everything else equal. It would mean fewer sales for businesses, it would mean fewer workers, lower tax revenues and the like. So while migration is overall beneficial and a major driver of our office’s long-term outlook, it is also the likely linchpin. As such, that makes migration a risk to the outlook as well.

Finally, Kanhaiya’s been looking into births a bit more in depth and I want to revisit the issue in the near future. The fact that births are not increasing much has a number of implications and also a number of drivers. There are also a few national studies/reports discussing this issue that I’d like to tie back to the Oreogn data as well.

Posted by: Josh Lehner | December 4, 2017

Supply Side Constraints

Economic growth has firmed and the expansion continues. As the aftermath of the oil bust recedes, there are not many leading indicators today keeping economists up at night. However that does not mean there are not issues to watch. In fact, the challenges the U.S. economy faces will change as we enter into a different phase of the business cycle. Moving forward, the U.S. economy will begin to hit supply side constraints. While some economists, including the Fed, believe we are already at or beyond full employment, the consistent low levels of inflation in recent years are likely evidence that supply constraints are not holding back economic growth yet. Price pressures have yet to build. How exactly the economy adjusts to reaching some of its current limits, and how the newly reconfigured Federal Reserve reacts are key questions. The answers may go a long way toward determining how long the current expansion lasts.

Now, which supply side constraints will bind the hardest can be challenging to identify in advance. What follows is an effort to think through and sort out which constraints are more likely to be challenges sooner than others. Specifically, the lack of credit availability, labor, new technologies (productivity), and production capacity look to be potential issues in the near future. On the other hand, supply constraints like the lack of raw materials or energy, inadequate infrastructure, or deteriorating international trade relations hurting the global supply chain may be less likely to restrain economic growth in the near-term, however they do remain risks worth watching.

Among the more likely candidates, labor, or the supply of workers is the most obvious. While the unemployment rate itself may be lower than the Federal Reserve’s estimate of the natural rate, it is an imperfect measure. The fact that participation rates remain lower today than in the 1990s and 2000s, even with demographic adjustments, suggest some slack remains. More-plentiful job opportunities for better-paying jobs will bring workers back into the labor market. Currently job openings are at all-time highs and wages continue their slow upward movement, albeit it fits and starts. As such, workers are coming back.

Putting another couple percentage points of prime-age Americans back to work is a reasonable, even minimal baseline outlook. This would match what the U.S. experienced in the mid-2000s. Oregon is already at this point today. However, beyond this you begin to run into larger, longer-run trends that may be harder to reverse. In particular, the rise of those out of the labor force due to illness or disability stands out. Reintegrating these individuals into the labor market is a very important challenge, not just from a labor perspective, but also for the public health and societal benefits that would come with it. A tight labor market will aid this cause considerably.

Additionally, when labor is tight, firms must dig a bit deeper into the resume stack to fill positions. Businesses must be willing to hire candidates with an incomplete skill set, or the long-term unemployed, or those with a gap on their resume. Firms may also compete not just on price (wages) but also on nonpecuniary benefits such as flexible working hours and the like. Similarly, for businesses looking to hire, on-the-job training for those with an incomplete skill set becomes more important in a tight labor market. Overall, the U.S. is not lacking for warm bodies to fill positions. The prime working-age population is growing. It is about attracting workers to fill needs and ensuring the workforce has the skills, or is able to obtain the skills needed.

Other supply constraints likely to impact the economy are the low levels of new business formation and weak productivity growth. Economists are well aware of these trends, but lack a consensus on what is causing these issues, let alone identifying solutions to propel future growth.

Furthermore, while overall industrial capacity utilization remains lower due to the energy sector and oil bust, total manufacturing capacity utilization recently hit a new cycle high. Absent business investment in new facilities and technologies, manufacturers may run out of room to grow sooner rather than later. Industries that are bumping up against capacity include motor vehicles and parts, plastics and rubber, aerospace, and fabricated metal. All other industries look to have some room for additional expansion before new production capacity is likely needed. Over the medium- or long-term the economy desperately needs these new investments, however the path from short-term bottlenecks to long-term economic gains may not be smooth.

Lastly, the lack of market information, or lack of confidence more generally can act as a supply side constraint as well. For businesses reaching capacity today, they need to either hold steady, which slows economic growth, or believe strongly enough in future growth that the firm will bear the risk of making long-term investments. Unfortunately, consumer or business surveys are noisy and typically bear little explanatory power in predicting future growth. However, the ongoing expansion is finally resulting in a tighter labor market and the benefits that come with it, like rising household incomes and falling poverty rates. These domestic gains, coupled with a revived international economy should indicate to firms that even though it took nearly a decade following the financial crisis,  the underlying economic demand is there. The U.S. economy is entering into a new phase of the business cycle; one it hasn’t seen in quite some time. Let’s see how firms and policymakers adjust.

Posted by: Josh Lehner | December 1, 2017

Retirements Hit Close to Home

The aging Baby Boomers are placing downward pressure on economic growth in recent years, and over the coming decade, possibly two. As they continue to enter retirement, net growth rates are and will be slower than we have become accustomed to. Take employment for example. For every retirement, a business must hire two workers to see net job growth. The first worker simply replaces the retiree, resulting in no job growth. A year ago, our office explored these issues a bit more in depth. The upshot is there should be enough jobs in the future, but the topline, net job growth numbers mask the generational churn below the surface.

It should also be pointed out that these recent retirees are not just any old workers. They represent workers with a lifetime of experience and institutional knowledge for their industries and firms. Such workers cannot instantaneously be replaced. It creates challenges for businesses to adjust and adapt. However it also creates new opportunities for current and future workers to gain experience and grow into these roles.

While these trends are undoubtedly true across the economy, they hit especially close to home here in the small world of Oregon economics. This fall, we say farewell and happy retirement to both Paul Warner and Tom Potiowsky. Paul may be better known for his role as the Legislative Revenue Officer these past 18 years or so, however prior to that Paul was the State Economist throughout the 1990s. Tom was a professor of economics at Portland State University in the 1980s and 1990s before succeeding Paul as the State Economist for the 2000s. In recent years Tom returned to Portland State where he chaired the Economics Department and launched the Northwest Economic Research Center (NERC). Tom has officially retired from the faculty but will continue working at NERC. Paul’s retirement is official as of today. However both promise to be around to offer us guidance and counseling.

With the simultaneous retirements of Oregon’s two longest serving State Economists, now is as good of time as ever to examine their careers and forecasting records. Our office after all is tasked with forecasting state tax collections. To this end our office has created a few State Economist statistics.

Given Oregon’s unique kicker laws, there is a very tiny window for which our office’s forecasts can hit the sweet spot. That happens when actual tax collections come in right at our forecast or slightly above it and yet below the kicker’s two percent threshold. Over the decades this has occurred just twice, one indication of how hard it is to hit the sweet spot. Paul did hit the sweet spot once, for his very first Close of Session personal income tax forecast ahead of the 1991-93 biennium. It was not for another 20 years that our office produced as accurate of a forecast.

Now, when it comes to forecasting, one major factor in accuracy is the pesky business cycle and the turning points of when the economy heads into or out of recession. Paul, luckily, never experienced a recession under his State Economist watch. Besides being a great economist, this lack of a recession greatly aided his median forecast error over time. Paul’s forecast errors are the lowest of any State Economist in Oregon’s history. That said, Paul’s Earned Kicker Average, or EKA, was high at .700. What this means is that Paul underestimated revenues by more than 2% (the kicker threshold) on 7 of his 10 Close of Session forecasts (5 each for the personal kicker, and the corporate kicker).

Tom on the other hand dealt with a significantly more challenging economy over his tenure and it shows in his State Economist statistics, which take nothing away from the economist and mentor he has proved himself to be. Tom’s first Close of Session forecast was ahead of the 2001-03 biennium, which turned out to be a forecaster’s worst nightmare. Economic growth had slowed, but it was not entirely apparent the economy was in a full blown recession at the time of the May 2001 forecast. The recession is now judged to have begun in March 2001, or right as our office was working on producing that May 2001 forecast. The result of predicting positive, but slower economic and revenue growth when in fact revenues plunged, was a large forecast error. 2001 was also the first time — but unfortunately not the last — that capital gains swung wildly following the dotcom crash. Not to be outdone, the economy soon turned up and on the back of the housing bubble, the 2005-07 biennium yielded the largest personal income tax kicker in Oregon’s history. What Tom’s State Economist statistics show is that forecasting during a volatile economic period results in larger forecast errors. Additionally Tom has a very low EKA – just 3 kickers in 8 opportunities – but when his forecasts did kick, boy did they ever.

Every current member of our office and of the Legislative Revenue Office owe a great deal of the opportunities we have had to Paul and/or Tom. We are forever grateful for their willingness to share their time, insights and expertise. Our office and the entire State of Oregon’s analytical functions are better off for their years of service. Their daily presence in the office will be missed personally and professionally. May Paul and Tom enjoy their retirements and come back now and again to help us sort out the mess they made continue in their footsteps.

Posted by: Josh Lehner | November 29, 2017

Oregon Economic and Revenue Forecast, December 2017

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The economic expansion is expected to continue. Economists see few worrisome signs in the current data. However the economy is poised to enter into a different phase of the business cycle in 2018. Continued low levels of inflation are likely one indication that the U.S. has yet to really reach its current capacity, or reach full employment even if the unemployment rate is quite low. However, the economy is likely to begin to run into supply side constraints in the near future and how the economy adjusts, and how policymakers react to these changes will go a long way toward determining when the expansion ends.

That said, the U.S. economy is beginning to hit the sweet spot like Oregon has in recent years. Employment and participation rates are rising some and wages continue to pick-up. As such household incomes are growing and poverty rates are falling. Oregon continues to transition down from peak growth rates seen a couple years ago to a more sustainable, long-term rate. However the latest population estimates indicate that migration trends have yet to slow thus far. Expectations are for population growth to taper in the short-term, in keeping with the economy. Moving forward, Oregon’s population growth will increasingly rely on migrants.

Oregon’s primary General Fund revenues continued to grow over the first few months of the 2017-19 biennium. Although this growth was healthy, exceeding what was seen in most states, collections have come in slightly lower than what was called for in the September forecast. However, recently processed personal income tax returns for filers with extensions and amendments suggest taxable income is likely larger than was previous estimated. The net result is a relatively unchanged General Fund forecast. Combined, the total resources from the General and Lottery Funds have increased $47.4 million relative to the September outlook. The majority of the increase comes from a stronger corporate tax outlook.

The primary risk facing the near-term revenue forecast is the potential for tax legislation at the federal level. From a broader economic perspective, the most significant local impact of federal tax changes will be what happens to the amount of federal taxes paid by Oregon’s households and businesses. However, in addition to what happens to the federal tax bill, many federal law changes stand to have larges impact on Oregon’s own revenue streams.

Oregon’s tax collections are tied to federal tax law both directly and indirectly.  The starting point for calculating Oregon income tax is taxable income from a filer’s federal return.  As a result, most federal changes to what is defined as income, or to what can be deducted or excluded from it, directly feed into Oregon tax collections.  After the last major federal tax reform in 1986, Oregon’s income tax revenues increased 20% the following year.

The most recent proposals call for increasing the standard deduction, while eliminating a range of itemized deductions.  Changes to the standard deduction only impact Oregon tax collections indirectly, while changes to itemized deductions can also directly flow into Oregon collections. Oregon defines its own standard deduction levels, disconnecting its revenues from the federal policy. Itemized deductions are where much of the uncertainty lies for both Oregon’s taxpayers and its state revenues. Oregon filers, high and low income alike, itemize at higher rates than the national average. Oregon’s taxpayers are able to claim a relatively large amount of deductions, in part due to a large amount of state income taxes paid.

As is always the case regarding tax policy, the devil is in the details. Federal tax reform has not yet passed, with amendments and revisions likely still to come.  Initial rough estimates by the Oregon Department of Revenue and Legislative Revenue Office suggest that the upward pressure created by federal reform could be large enough to trigger Oregon’s unique kicker law all else being equal.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | November 28, 2017

Rural Job Growth Picking Up (Map of the Week)

As our office has been talking a lot about in recent years, Oregon’s economy is slowing. Now, it is still growing. We are adding jobs, seeing income gains and the like. However the pace of growth is slower today than a year or two ago. In fact, job growth has decelerated by a full percentage point over the past two years. This slowing is largely, if not entirely for good reasons. An economy digging out of a recession behaves differently than one approaching full employment. The economy needs to transition down from those peak growth rates to something more sustainable.

All of that said, we are seeing differing regional patterns within the state. One reason is that each regional economy’s business cycle is a bit different in its timing, severity and duration, even as Oregon as a whole follows the national business cycle. A lot of this is due to the local industrial structure.

Today, what we’re seeing is Oregon and most of its large, urban areas slow as they approach full employment. Rural Oregon overall is not slowing to the same extent. Rural Oregon is also further from full employment, but is making progress. In fact, since the spring of 2015, rural Oregon has added jobs at a pretty steady 2 percent annual pace. These gains in rural Oregon outpace what the nation and the typical state have seen over this time period. Encouragingly, as seen in this edition of the Map of the Week, a number of the hardest hit counties and areas of the state are actually seeing a pick-up in growth over the past two years. All counties are also seeing population gains in recent years as well.

What the map shows are the counties with faster job growth today than in 2015 (blue), those with similar growth rates today to what they saw in 2015 (yellow), and those that have decelerated since 2015 (gray). Outside of Linn (Albany MSA), Josephine (Grants Pass MSA), and Columbia (hard hit exurb of the Portland MSA) all of Oregon’s urban counties have held steady or decelerated over the past two years. Just over half of rural counties have seen steady or faster job gains.

Now, not every county or every region has fully recovered from the Great Recession and its aftermath. However growth is improving and the expansion continues. Currently, 35 out of Oregon’s 36 counties are seeing job gains over the past year. And 21 of 36 counties have more jobs today than prior to the Great Recession.

Posted by: Josh Lehner | November 21, 2017

Thanksgiving, Traffic, and your Nephew

Three thoughts as Thanksgiving nears.

First, many of us will be stuck in traffic as we head to meet our family and friends. AAA of Oregon/Idaho estimates it will be the worst traffic since 2005. Most of this congestion is about the abnormally large number of cars trying to drive at peak holiday times, but we have seen overall increases in traffic in recent years.

It is hard to portion exact blame for the increases in total vehicle miles traveled (VMT) in Oregon. That said, we know truck traffic is up about the same as passenger vehicle traffic. We know a growing population usually results in more driving. However, if you separate population growth on one hand (number of people, or potential drivers), and driving behavior (number of actual drivers, what each driver does) on the other hand, you get a rough 40-60 split. That means changes in driving behavior account for the lion’s share of the VMT increases. It’s about more than population growth.

Some of the VMT gains are likely due to a stronger economy. We have more jobs, and higher incomes, so we’re able to afford to drive more. Similarly, Oregon has seen larger increases in vehicle registrations and driver licenses issued than population growth alone would suggest. That said, the big drop in gas prices that began in late 2014, and the increases in fuel economy/fuel efficiency are major factors at work too. As the price per gallon of gasoline dropped by more than a third, Oregonians have increased their total gallons of gas purchased by about 10%. Oregonians are buying more gas in order to drive more. A similar effect is seen in fuel efficiency: as the cost per mile driven falls, we drive a bit more. Although fuel efficiency is plateauing for new purchases in recent years, at least in part because Americans/Oregonians are purchasing more trucks and few cars. The overall efficiency of the fleet can continue to increase as older vehicles are taken off the road, however.

Some academic studies show that the price drop we have seen in recent years is more than enough to explain the increases in VMT. That implies that all of the increase in traffic is due to lower gas prices and not about population growth or other factors. However, other studies show that maybe 20% of the VMT increase can be explained by the price drops. I don’t want to get into the warring battle between studies, but it’s clear that prices matter and are a significant factor influencing traffic in recent years. It is also a distinct possibility that lower gas prices are the primary, even sole, driver of the traffic increases.

Second, as we sit around the table with our friends and family, inevitably the topic of what our children, or our nieces and nephews are doing will arise. Parents love to talk about their kids, and, at times, other people’s kids as well. Along these lines, there has been a lot of hand-wringing in recent years about the lack of summer jobs for teenagers. This includes the plummeting labor force participation rates for young Americans and young Oregonians alike. As such, it is true that kids these days are not working to the same degree as past generations. That does not mean, however, that they’re necessarily up to no good.

Youth crime is down by more than half, and there has not been a huge increase in the number of Idle Youth. The decline in LFPR has been nearly perfectly offset by increased enrollments in school. Over time educational attainment is rising, which is the silver lining to today’s lower participation rates. We have fewer potential workers today, but tomorrow’s workers will have better skills. Or so the story goes. And enrollments are falling today as the economy strengthens, but that is a topic for another day. This week: be nice to your nephew!

Now, this doesn’t mean there aren’t potential issues with lower participation rates. Chiefly, one misses out on work experience and learning the so-called soft skills like communication, taking directions, accepting feedback, being a team player, and the like that are needed to succeed in most workplaces.

And finally, third, Happy Thanksgiving everyone!

Posted by: Josh Lehner | November 16, 2017

Oregon’s Population Growth, 2017 Update

Apologies for the lack of recent posts, I have been in and out of the office a lot lately. However I am back up and running now ahead of our next forecast that will be released Nov 29.

Yesterday some of the most important economic numbers for Oregon were released. I’m not talking about jobs, or wages, or taxes paid. Rather, I’m referring to the Portland State Population Research Center’s preliminary 2017 population estimates for Oregon, and cities and counties. [Press release here, data here] These numbers matter considerably because they are the official state estimates used for distributing shared revenues, land use laws, and the like. However it should be noted that PSU tends to be more accurate than Census estimates in real time, for these intercensal years. Now, the 2017 numbers will be certified and made official next month but let’s dig into them a little bit with a high level look.

Our office’s baseline outlook has called for population growth to slow overall as the economy transitions down to a more sustainable, longer-run rate. In an earlier post we looked at surrendered driver licenses at Oregon DMVs which is a good leading indicator. That showed that population growth had likely topped out. Well, the latest population data shows that overall population growth statewide did not slow in 2017, but it does appear to be topping out in the near future. The second derivative has turned negative. Specifically, the new PSU numbers show that in 2017 Oregon population increased by 64,750 or 1.59% which was a bit stronger than in 2016 when the state added 62,505 new residents for a 1.56% increase. Net migration drives the vast majority of Oregon’s population gains, particularly as the natural increase continues to slow. That is, births still outnumber deaths in Oregon, but that gap is narrowing.

Our office still believes slower population growth is the right near-term outlook, however it did not come to pass in 2017. Along with these new numbers, our office will be updating our statewide population forecast in the near future to take them into account. I will post Kanhaiya’s new outlook when he finalizes it.

Looking across the state, every single region and every single county added population in 2017. Some faster than others of course, but all parts of Oregon are growing which is good news for the regional economic outlook. Of course the type of population growth matters, and we will get more detailed population data in the coming months. For now, PSU has released the total numbers and they show positive trends across Oregon.

Finally, for those interested in the county level figures, the trellis chart below compares local population growth trends with the statewide average. Again, every single county added residents in 2017. Every county saw population growth in 2015 as well. Only one county (Grant) lost population in 2014 and 2016 while all others saw gains. So we have now seen, essentially, 4 years where every part of Oregon is growing again.

Given the robust gains during the housing boom/bubble in Central Oregon, we have to put them on a separate chart in order to not mess up the axis on the trellis above. While similar in pattern, Central Oregon has returned to super-charged growth rates.

Stay tuned for more on regional and local population trends in the coming months as our office works to update our outlook and PSU releases additional information early next year. Additionally, I will have a bit more on decomposing the gains in the Portland (and Seattle) areas, looking at City vs Suburbs and the like.

When trying to look at a regional economy’s longer-run potential, one key driver is population growth, and the underlying demographics. Specifically, if an area is able to see a growing working-age population, the region is obviously better poised for growth. Our office calls the root-setting years, 25-34 years of age, the gold standard for economic development. The reason is migration rates plunge considerably as folks age into their late 30s and 40s and beyond. So once a region is able to attract 20- and 30-somethings, the region generally has them for their peak working years. Historically, this has been one of Oregon’s comparative advantages — the ability to attract and retain young, working-age households. However, working-age population gains can also be due to higher local birth rates and not just due to migration patterns (e.g. Salem’s bright future.)

All of this, combined with the fact I’ve given a handful of presentations in Lane County this year, leads us to this edition of the Graph of the Week. While population growth is overall advantageous — even if it does come with some growing pains — the type of growth matters. The chart below shows expected population growth in Oregon and in Lane County (Eugene MSA) based on the most recent population forecasts from our office and from Portland State’s Population Research Center. The point here isn’t to argue about which forecast is best, but rather to highlight the implications of the differences between them.

First, notice over on the left. Both our office’s 2013 forecast and PSU’s 2015 forecast for Lane County are pretty much identical. Our office forecasts annual population growth to be 0.85% between 2015 and 2030, while PSU forecasts it to be 0.90%. No real difference. However the composition of that growth is considerably different. Our office’s outlook expects growth in the all-important 25-44 year old age group to be twice as fast as what PSU forecasts. Conversely, PSU expects growth in the 65+ age group to be nearly twice as fast as our office’s forecast.

In terms of the longer-run outlook, or in terms of the region’s potential economic growth, which forecast is more accurate is Lane County’s million dollar question. If reality is closer to the blue bars, Lane County will see stronger economic growth moving forward. From an industrial structure perspective, the region looks solid. There is not some local imbalance that is likely to hold back growth relative to the rest of the state. However, if reality is closer to the gray bars, Lane County’s overall economic growth would be expected to be slower. The limiting factor would not be the industrial structure, but the labor force.

These questions, and the implications that arise are important to each regional economy. I am using Lane County as an example because I have spent more time lately thinking about the Eugene MSA and also because of the relative differences in the two outlooks. Again, I’m not trying to argue which forecast is best, but rather to highlight the differences and how to think about the outlook. Note that Portland State’s Population Research Center is currently working on updating the Region 1 forecasts (including Lane). In the past month they have held public meetings to discuss the data and outlook, and will release the new forecasts by mid-2018.

Finally, a few summary notes on the Eugene MSA. The Great Recession was more severe in Lane County than in much of the state. The region’s lost manufacturing jobs are not cyclical, but structural. In some other regions, manufacturing losses were largely cyclical. Not in Lane County. It takes a long time to reorient an economy after suffering such large losses. As such, the Eugene MSA’s recovery took awhile to get going, however growth in recent years has been pretty good. The region’s jobs gap — the difference between actual employment trends and population growth — is nearly gone. Overall, the Eugene region’s economic trends closely track the typical urban areas across the country in recent decades. Furthermore, the region’s trends closely track those seen in other parts of the country that have similar industrial structures. Looking forward, Lane County’s industrial structure is pretty well balanced for growth, when compared with the state overall. There is not some industrial structure imbalance that looks to weigh on growth moving forward.

UPDATE: In the comments, Brian Rooney, the Employment Department’s regional economist for Lane County, adds the following:

It’s interesting that PSU has such strong growth in the 65+ age category. Lane does get some in-migration from retirees in the coastal area around Florence, but that’s a relatively small portion of the overall county population. The Eugene area also has available health care with the Riverbend hospital and a VA clinic that may be attractive to retirees. On the other hand, we also get some young professional, lifestyle in-migration and there are U of O graduates who want to stay in the area. It will be interesting to see if PSU makes an adjustment to the forecast when it is published in mid-2018.

Posted by: Josh Lehner | October 27, 2017

Oregon Vice

Yesterday, I had the privilege of presenting on Oregon’s vice revenues as part of Tim Duy’s Oregon Economic Forum. Our office’s duties include forecasting these revenues as part of the General and Lottery Fund forecasts. However, hardly anybody ever asks us about them specifically, other than in the context of the overall forecast and budget discussion. I think this is for at least three reasons.

First is their relative size. While these vice revenues total $2.7 billion in the current biennium (the state keeps about $2.4 billion, the remainder is shared or transferred to cities and counties), this represents about 3% of the state’s All Funds budget. In the context of the General and Lottery Funds, these revenues account for 9% of the total. So they’re clearly important in the big picture, but represent a relatively small share of the overall budget.

Second, most of these vice revenues do not have much of an economic impact in Oregon. Some, of course, do have costs associated with them. That said, we don’t specialize in tobacco manufacturing, nor are we Las Vegas. These revenues are generated based on daily behaviors of Oregonians, but they’re largest taxes assessed on products brought into the state.

Third, the vast majority of us abstain entirely or consume our vices in moderation. They represent no portion or a small portion of our time and our budgets. Enjoyable, but largely immaterial to our well-being. And we get a little uncomfortable thinking about those who do not consume in moderation, and thinking about the societal or public health impacts of excess.

With that in mind, below is a copy of the presentation slides. For those interested in more, you can click on the link below to download a copy of the slides with notes that summarize the research and talking points behind the slides.

Oregon Vice Revenue Slide Notes

Note: Due to timing, I stopped the actual presentation on slide 12 and did not discuss the labor force participation issues or the Deaths of Despair. For this reason I am not including the associated notes on that portion. Additionally, our office does have a forthcoming report in the works on the Deaths of Despair, so stay tuned for that in a few weeks.

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